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Retail Law Advisor

The Future of Urban Retail: A Business Real Estate Roundtable

Posted in Real Estate, Retail

NYC retailAs the competitive retail marketplace continues to shape itself, we take an active role monitoring trends and uncovering the legal ramifications.  This week, we are pleased to share Crain’s New York Business Real Estate Roundtable. In this piece, the discussion centers on The Future of Urban Retail. Our partner and leader in New York real estate retail, David Rabinowitz, answers questions ranging from what his clients are concerned about these days, the state of the luxury retail market in NYC, and the explosion of experiential retail concepts and why they’re so effective. Read more from Crain’s.

Give Me a Break: Break Me Off a Piece of That…Meal Kit?

Posted in Restaurants, Retail

meal kitShort on time and patience, consumers are jumping on the bandwagon of meal kits and meal kit delivery services, which have taken the retail food industry by storm.  Meal kits and meal kit delivery services – such as, Plated, Blue Apron, HelloFresh and Purple Carrot – are all the rage these days primarily due to their convenience, healthier food and beverage options, and price points. Meal kits and meal kit delivery services provide subscribers with pre-measured, packaged and fresh ingredients along with straightforward, simple to follow recipes that make whipping up a nutritious meal as easy as child’s play. These services have effectively altered consumers’ idea of convenience, and carved out a niche market within the retail food industry to the tune of potentially $35 billion by 2025. By giving consumers exactly what they want – flavorful meals that don’t require much forethought or time spent within a grocery store – these services are leaving restaurants and grocery stores alike to wonder whether they are on the verge of becoming passé

One of the key factors driving the success of meal kits and meal kit delivery services is convenience.  Subscribers of these services are often individuals who know their way around the kitchen and want a fresh, home-cooked meal, but lack the time to go grocery shopping on a daily basis. Through the use of websites and other technology, these meal kit services have streamlined the meal preparation process and become a more than viable middle ground between sit-down restaurants and take-out orders. Another factor catapulting the success of these services is freshness. With a consumer base hyper-focused on healthier, fresher options, the farm-to-table philosophy of these meal kit services greatly appeals to consumers looking for unprocessed food. Since these meal kit services’ favor local, farm grown ingredients for their menus, partnerships between these meal kit services and local farmers have increased exponentially over the past few years and generated farm-fresh specialty ingredients specifically grown for and tailored to these services’ menus. This symbiotic relationship has been beneficial to the meal kit companies and local farmers since meal kit services are able to acquire fresh produce at a lower cost than grocery stores and local farmers can expect predictable demand for their crops.

At a time when much of the retail food industry is struggling to stay above of water – evidenced by the demise of many fast-food chains and grocery stores – meal kit services have gone from relative obscurity to a multi-billion dollar goldmine.  And, this success has not gone unnoticed. In fact, Whole Foods has decided to throw its hat in the ring and join forces with an enterprising start-up, Purple Carrot, to roll out plant-based meal kits in its stores. Faced with declining profits and the closure of some of its brick and mortar locations, Whole Foods, in a calculated leap of faith, is hoping that this partnership will reinvigorate its target customer base. At the same time, Purple Carrot hopes that its partnership with Whole Foods will give it additional visibility and the opportunity to become a household name in the meal kit industry.

Given the impressive metrics of the meal kit industry to date, it certainly has the potential to upend restaurants and grocery stores in terms of revenue. This impressive tour de force by meal kit services has caught the attention of traditional food industry juggernauts, such as Tyson Foods and Martha Stewart, and has prompted many to believe that meal kit services have staying power and should not be considered just another fad in the retail food industry.

Blazing the Trail: SJC to Decide Medical Marijuana Discrimination Case

Posted in Employment, Retail

marijuana-300x208Marijuana in the workplace is currently a hot topic for retail employers, especially since voters in Massachusetts and other states legalized the recreational use of marijuana in November 2016. The law that passed and became effective in December 2016 explicitly notes that employers retain their authority to implement policies and practices restricting employees’ use of marijuana, and employers are not required to accommodate any conduct permitted by the law. Nevertheless, employers may still face pressure to adjust their hiring practices and employee policies as marijuana use becomes more publically acceptable.

One topic in particular that courts are dealing with now is employees’ use of medical marijuana. The use of medical marijuana has been legal in Massachusetts since January 2013 after Massachusetts voters similarly approved of its use by a ballot initiative in November 2012. A case is currently pending at the Massachusetts Supreme Judicial Court that deals with the issue of whether an employer’s failure to provide reasonable accommodation for an employee’s use of medical marijuana constitutes discrimination.

The plaintiff employee had a prescription for medical marijuana. In 2014, the employee was terminated by her employer after her drug test came back positive for marijuana. The employee brought claims against the employer, which included discrimination on the basis of her disability and invasion of privacy. Specifically, the employee alleged, among other things, that the employer discriminated against her by not providing a reasonable accommodation for her medicinal use of marijuana, and that her employer invaded her privacy by requiring her to take a drug test. The trial court dismissed all counts in the employee’s complaint except her invasion of privacy claim. The court reasoned that there was no support for finding that Massachusetts requires an employer to provide accommodation for an employee’s medicinal use of marijuana.

The employee applied for direct appellate review, which the Supreme Judicial Court granted. In March 2017, the Supreme Judicial Court heard oral arguments and the case is currently under advisement. Time will tell how the state’s highest court will handle the issue of workplace accommodation for medical marijuana use. At the very least, the survival of the invasion of privacy claim at the trial court level suggests that the legal use of marijuana will continue to present unique challenges for employers.

To Tax or Not to Tax Internet Retailers, that is the Question

Posted in Retail, Retail Sales, Tax

crowd-fundingSince the dawn of the age of e-commerce, brick-and-mortar retailers have championed “the level playing field”. Their battle cry: Internet retailers should be subject to sales tax just like us!

This disparity is largely the result of a 1992 US Supreme Court decision, Quill Corp. v. North Dakota, in which SCOTUS found that a business whose only connection with a state is through a common carrier or the mail lacks the “sufficient nexus” under the Commerce Clause necessary to subject that business to the state’s use tax. Quill was subsequently applied to online retailers to mean that a state could not impose sales tax on an out-of-state business if that business did not have a physical presence in the taxing state (i.e., no warehouse, store, office or sales rep located there).  For decades, this finding has allowed online retailers to maintain a market advantage over traditional in-state brick-and-mortar retailers and has cost state and local governments millions in lost tax revenue. Many states require their residents who purchase goods over the Internet without paying sales tax to declare the tax when filing their year-end tax returns; however, few taxpayers do, and states have difficulty enforcing the requirement.

Several attempts to obligate online retailers to collect sales tax have been unsuccessful in Congress. States have had varying results. In 2008, New York passed the “Amazon Law” which requires out-of-state, online retailers to collect sales tax from New York customers if (i) that retailer has a click-through arrangement with an individual vendor located in New York, (ii) the out-of-state, online retailer receives a commission for such referrals to individual vendors, and (iii) the out-of-state, online retailer’s gross receipts from its sales to New York customers exceeded $10,000 during the preceding 12 months. A click-through arrangement allows a third party (in this case, the out-of-state, online retailer) to display a link on its website enabling consumers to click through to an individual vendor’s website (in this case, an individual vendor located in New York). The click-through arrangement allowed New York to establish a substantial nexus between the out-of-state, online retailer and New York because the individual vendor(s) was physically located in New York.

Massachusetts followed suit a few years later in 2013 when it began collecting its 6.25% state sales tax on purchases from Amazon. The physical presence requirement was met because Amazon had an office in Cambridge and a technology firm located in North Reading.

As of April 1, 2017, Amazon now collects sales tax from all 45 states that have a statewide sales tax. Other Internet retailers, however, still do not collect sales tax from their buyers.

Earlier this year, New York Governor Andrew Cuomo proposed that New York change its tax rules to collect sales tax not only from vendors located inside the state, but also those located outside of it. His proposal, which would likely have been subject to litigation, would have required online marketplaces with more than $100 million in annual sales to collect sales tax on behalf of individual vendors located outside of New York who sell goods to New York state residents. Governor Cuomo predicted his proposal could generate about $200 million in sales tax over the next two years.

Luckily for companies like Etsy and eBay, to name a few, Governor Cuomo’s proposal was not included in the New York state budget deal for fiscal year 2017-18. For the time being, at least, the status quo in New York will remain unchanged.

But politicians in New York are not the only ones attempting to find ways around Quill. The Massachusetts Department of Revenue recently directed out-of-state vendors to collect sales tax on Massachusetts purchases beginning on July 1, 2017, arguing, among other things, that the software applications that sellers put on customers’ computers and smartphones constitute a physical presence in the Commonwealth. This directive, which can be implemented without legislative approval, will impact out-of-state Internet retailers that sell more than $500,000 of goods annually but will exclude those with fewer than 100 transactions per year. Massachusetts Governor Charlie Baker expects the directive to raise $30 million for the next fiscal year. Tax experts and opponents of the initiative predict that Governor Baker’s directive will be challenged in court.

The jury is still out as to whether these attempts (and others like them in Arkansas, Georgia, Mississippi, Utah and New Mexico) to increase the number of Internet retailers required to collect sales tax will survive the scrutiny they will undoubtedly face from tech titans and lobbyists.  But it seems clear that those in favor of collecting sales tax from online retailers will continue to charge ahead, despite setbacks.

Supreme Court Says ‘Give Me a ©’ to the Fashion Industry

Posted in Intellectual Property, Litigation, Retail

copyrightA recent U.S. Supreme Court copyright decision analyzing cheerleader uniforms may have a profound impact on retailers, and on the fashion industry in particular. On March 22, 2017, the Supreme Court held in Star Athletica, L.L.C. v. Varsity Brands, Inc. that original design elements that are separable from the “useful article” upon which they are affixed may be eligible for copyright protection if independently copyrightable. Fabric designs have received copyright protection for years, but apparel designs have traditionally been protected only by design patents and trade dress. The Supreme Court’s decision may now provide increased intellectual property protection to the fashion industry in the form of copyright protection, which is relatively quicker and less expensive to obtain, and provides enforcement advantages. This may embolden designers to increase their enforcement efforts and, in turn, their prices for retail goods incorporating copyrighted designs.

Form Does Not Necessarily Follow Function

Section 101 of the Copyright Act defines a “useful article” as “an article having an intrinsic utilitarian function that is not merely to portray the appearance of the article or to convey information.”  The design of a “useful article” is copyrightable “only if, and only to the extent that, such design incorporates pictorial, graphic, or sculptural features that can be identified separately from, and are capable of existing independently of, the utilitarian aspects of the article.”

The Supreme Court sought to clarify this concept, which has historically confused courts, by providing a two-part test for determining whether the design of a “useful article” is copyrightable:

an artistic feature of the design of a useful article is eligible for copyright protection if the feature (1) can be perceived as a two- or three-dimensional work of art separate from the useful article and (2) would qualify as a protectable pictorial, graphic, or sculptural work either on its own or in some other medium if imagined separately from the useful article.

Is a Cheerleader Uniform Copyrightable?

No, but the artistic features that are separable from the uniform might be.  To illustrate, the cheerleader uniforms analyzed by the Supreme Court are depicted below:

Copyright Blog Images

Writing for the majority, Justice Thomas applied the two-part test to the uniforms’ “surface decorations,” comprising the colors, shapes, stripes and chevrons, as follows:

First, one can identify the decorations as features having pictorial, graphic, or sculptural qualities. Second, if the arrangement of colors, shapes, stripes, and chevrons on the surface of the cheerleading uniforms were separated from the uniform and applied in another medium—for example, on a painter’s canvas—they would qualify as “two-dimensional . . . works of . . . art,” §101. And imaginatively removing the surface decorations from the uniforms and applying them in another medium would not replicate the uniform itself.

Although Justice Thomas called this analysis “straightforward,” the inherently subjective nature of the issue is likely to cause debate and litigation for years to come. Indeed, the dissenting opinion observed that separating the surface decorations still yields an unprotectable cheerleader uniform.

Impact on the Retail and Fashion Industries

The implications of this case for the retail and fashion industries may be significant. Copyright registrations are relatively quick and inexpensive to obtain as compared to design patents or trade dress protection. Additionally, copyright registrations may entitle the owner to statutory damages and attorneys’ fees for infringement while trade dress and design patents require the owner to prove damages, and permit fee shifting only in “exceptional cases.”

This could potentially drive up prices in the retail market, as designers may now wield an extra layer of intellectual property rights and more aggressively police their designs. For example, trends in the fashion industry often incorporate basic design schemes that have traditionally been considered unprotectable design elements. Although some such designs may lack the originality required for copyright protection, smaller companies may not have the resources to defend copyright infringement claims asserted by much larger design firms. In fact, eight days after the Supreme Court’s decision, Puma sued Forever 21 in California federal court for trade dress and design patent infringement, as well as copyright infringement, for the design of shoes, citing the Supreme Court’s opinion.

Now more than ever, designers should consider the scope of protection afforded not only to their own designs, but to those of their competitors.

The Rise of Concierge Retail

Posted in Retail, Retail Sales

online-parcel-deliveryRetailers have always had to balance a number of different competing factors in order to stay competitive, including location, marketing and convenience. As discussed in this space, in today’s market, many retailers are employing an omni-channel retail strategy, making their items available for purchase through multiple channels, such as in-store, online and via smartphone devices. And some companies are doing even more. In the traditional retail model, companies endeavor to make their goods and services as accessible to consumers as possible, so that when the customer needs or wants a particular item or service, they are able to find the right store and make their purchase (and hopefully a few additional unintended items as well!). And while retailers have historically focused their retailing strategies on location, marketing and convenience, there is another blossoming industry trend that appears to be with us to stay – what we would call “concierge retail”.

For example, subscription box services are now available for nearly any item, hobby, or lifestyle that you can imagine. Really love French pastries? There’s a subscription box for that. Hate buying razors?There’s a subscription box for that. Just had a baby? You can get diapers and wipes delivered to your door every month! The main story behind these subscription box services is one of convenience. In today’s hectic world of constant connectivity to work and dual income households, the ease of home delivery via box subscription services can be quite appealing. But sometimes these subscription services do more than just deliver goods periodically- they introduce the consumer to new products, things that the consumer does not even know that they want. And it’s in this fashion that the subscription box service becomes more than a story about convenience, but also one of concierge retail.

Companies such as Stitch Fix don’t sell consumers a specific product. Rather, the consumer signs up for a clothing subscription, enters his or her sizes and style preferences, and then waits to see what will arrive. Each shipment costs a flat rate as a “styling fee” and includes several articles of clothing or accessories. The consumer can decide which items to keep and which to return, but the styling fee is never refunded. Therefore, the company is selling clothing, but also introducing consumers to a style or brand they may not have otherwise considered. But clothing is not the only thing following this trend. Personalized boxes are available for everything from beauty products to dog toys to wine, taking into account the consumer’s (or their dog’s) preferences.

And these strategies seem to be working. Stitchfix brought in $250 million in revenue in 2015, and even more last year, while wine clubs saw double digit growth in 2016. While location, marketing and convenience are still important factors for a retailer to consider, today’s consumers are looking for more personalized experiences, and concierge retail appears to be offering just that. Rather than presenting and delivering goods as a typical commodity, retailers are using the box subscription service as a means to tailor their products to the particular customer and provide a more individualized experience, along with the allure of the element of surprise.

Tip Pooling by Restaurant Owners-Remains in Flux

Posted in Restaurants, Retail

TipsRestaurant owners with tipped employees should take note of several recent court cases which may affect their ability to cause restaurant employees to participate in “tip pooling,” particularly in instances where back-of-house employees are included in such tip pooling arrangements.

The Fair Labor Standards Act (FLSA) allows employers to fulfill part of their federal minimum hourly wage obligation to a tipped employee with tips received by such employees. Therefore, an employer may elect, rather than paying a tipped employee a minimum wage of $7.25 per hour, to pay such tipped employee a minimum wage of $2.13 per hour, with the balance of such employee’s minimum hourly wage covered by the tips received by such employee. This practice is known as taking a “tip credit.” The FLSA requires employers who take a tip credit (i) to give notice of such election to its employees, and (ii) to allow its tipped employees to retain all tips they receive, unless such employees participate in a valid tip pool. Under the FLSA, a tip pool is considered valid if it is comprised exclusively of employees who are “customarily and regularly” tipped, such as waiters, waitresses, bellhops, counter personnel (who serve customers), bussers and service bartenders. An employer who avails itself of the tip credit, therefore, cannot include back-of-house employees who are not “customarily and regularly” tipped (such as dishwashers, cooks, chefs and janitors) in a tip pool.

In the last few years, however, a question has arisen with respect to whether the FLSA imposes restrictions on tip-pooling when an employer does not take a tip credit. Specifically, whether an employer who pays its tipped employees at least $7.25 per hour can impose a tip pooling scheme that includes back-of house employees who are not customarily and regularly tipped. In 2010, the Ninth Circuit Court of Appeals ruled that under the FLSA it was acceptable for an employer that did not take the tip credit (i.e., an employer that paid its tipped employees the full federal minimum hourly wage) to require tipped employees to pool their tips with non-tipped employees because the relevant section of the FLSA is silent as to employers who do not take a tip credit (only expressly imposing the “customarily and regularly” tipped requirement on employers who did take the tip credit).

In response to the 2010 Ninth Circuit ruling, the Department of Labor instituted regulations extending the “customarily and regularly” tipped requirement for tip pooling to instances where an employer does not take the tip credit, thus making it so that no employers, including those that do not take the tip credit, can include back-of-house employees in their tip pooling arrangements. Soon thereafter, several district courts held such new regulations to be invalid, finding that the relevant language of the FLSA imposed a condition on taking a tip credit (that if the tip credit was taken, tip pooling could only include customarily and regularly tipped employees) rather than a freestanding requirement pertaining to all tipped employees. Then, in a split decision that surprised many observers, the Ninth Circuit reversed the district court decisions, holding that the fact that the FLSA was silent on tip pooling restrictions when an employer does not take the tip credit did not foreclose the Department of Labor from promulgating reasonable regulations with respect thereto.

A writ of Certiorari with respect to the Ninth Circuit decision has been filed with the Supreme Court. Until such time as the Supreme Court decides whether to hear the case, restaurant owners may want to exercise caution before extending tip pooling arrangements to include back-of-house employees who are not customarily and regularly tipped.

End Of An Era Or Simply a Moment In Time?

Posted in Landlords, Leasing, Real Estate, Retail, Retail Sales, Tenant

NYC retailWhat conclusions can we draw from the increasing vacancy rates in prime NYC retail real estate?  A momentary blip? Something we’ve seen many times before, only to be followed by the inevitable climb in rents to their customary stratospheric levels? Analysts claim that rents in the retail sweet spot of Madison Avenue between 57th and 77th have come down to $1,100 per square foot from $1,800 per square foot in a little more than a year. Similarly, SoHo rents are down 8% in less than a year. We can’t predict the future, but we can certainly point out circumstances contributing to the current state of retail anxiety. In the past, international luxury retailers might have viewed Madison or Fifth Avenue locations as marketing plays designed primarily to strengthen their brand (or, at least, match the competition). More recently, these retailers are balking at the landlord’s rent numbers. What’s behind this reticence? A less friendly political climate could be partly to blame. The travel industry claims that visits to NYC are down since the election. Foreign visitors are critical to luxury sales. We can add to the list the increasing number of Manhattan neighborhoods friendly to retail. Ten years ago, the Meatpacking District and Hudson Yards wouldn’t have been on anyone’s list; they are now attracting retailers from their customary haunts.

Until now, we might have argued that NYC retail paid no heed to nationwide trends and was immune from fluctuations wreaking havoc in the “hinterlands”. After all, any foreign retailer intending to plant its flag in the States would first establish a beachhead in Manhattan. For several reasons, we’re not certain that’s the case anymore. From our experience counseling international retailers entering the US market, their focus is on locating where their customers live and work—and that might not be Manhattan. Would it be better to get some buzz with four stores in New England or one in Manhattan if the capital outlay is the same? Additionally, for years, luxury and entry level luxury retailers have battled schizophrenia between the enticement of hefty profits at outlet centers and the threat of diluting the brand. The aspirational outlet buyer—attracted to brands previously outside their reach—will only be retained at the right price. And if that’s to be found at the outlet store or on-line at Gilt, Ebay, Barneys Warehouse or elsewhere, there’s one thing for certain: they aren’t paying full price on Madison or Fifth.

Economics 100 teaches us that the market is self-correcting. As prices drop, more purchasers (i.e. tenants) will be attracted to the market. At some point, with more tenants chasing fewer spaces, rents will again increase. If you read further in your economics textbook, you might have come to a discussion of inflexion points. That’s the time in the life of a business when its fundamentals are about to change. Andrew Grove wrote that “change can mean an opportunity to rise to new heights. But it may just as likely signal the beginning of the end”. We are not going to predict whether current NYC retail trends represent an inflexion point. Some data points are not encouraging; the huge amount of space occupied by restaurant and entertainment is notoriously sensitive to downturns in the economic cycle. Furthermore, overleveraged property owners are locked into rent structures to support debt and could face foreclosure if tenants willing to pay those rents are simply not to be found. Nevertheless, we remain optimistic that there are new retailers around the corner busy inventing the next product we simply have to own. After all, until last year, who knew that we all had to have a $900 down jackets sporting a nifty little label on its sleeve?

How Grocery Stores Are Starting to Cash in on the Blue Apron Trend

Posted in Retail

The Rise of the Gourmet Home Chef

Cart and ComputerBoxed meal delivery services like Blue Apron and Plated have steadily risen in popularity since they entered the market in 2012. Meal kit delivery services offer consumers a no-hassle way to cook meals at home, without having to find recipes, plan meals, or go grocery shopping. Instead, each week (meal delivery services are generally subscription-based, so you sign on for a shipment every week) a box arrives at your doorstep, filled with the exact number of ingredients needed to cook a few meals for the week (typically 3-5 dinners) with step-by-step recipe instructions. The market has become so segmented that companies now cater to every kind of customer from vegans (Purple Carrot), to locavores (Just Add Cooking), to families (Hello Fresh’s Family Box).

Meal kits are a multi-billion per year business that is poised to eat into traditional retail food services, including both grocery and restaurants. Meal kits are projected to rise to about $3 to $5 billion in market share in the next 10 years. The rise of meal kits signals a shift in how consumers want to provide meals for themselves and their families. Americans are looking for an easy and quick way to cook nutritious meals – particularly dinners – at home.  We are not just making our family recipes, but are increasingly inspired by television cooking shows and gourmet restaurants, and are looking for creative, but manageable, recipes to make at home.

Admittedly, meal kits are a small silver of the overall $1.46 trillion Americans spend annually on food and beverages in grocery stores and other retailers.  Additionally, meal kits have their own drawbacks, including the perceived waste of shipping and packaging materials.  Meal kits also suffer from a major retention problem as research shows that only 50% of customers signup after the first week, and 90% of customers leave meal kit subscriptions within six months.

In light of these challenges, grocery stores have a great opportunity to capitalize on the meal kit business.

Grocery Stores’ Meal Prep Offerings

Whole Foods has recently partnered with Purple Carrot to offer plant-based meal kits in its Dedham, Massachusetts store, with plans to expand the partnership.  The in-store meal boxes are cross promoted, so that if a customer makes a favorite meal, all the ingredients are easily available for purchase in-store to recreate it.

Grocery stores can also offer meal kits for delivery, through existing delivery services such as Instacart and Peapod, which provide all the benefits of a meal kit without the annoyance of a subscription.  Customers can simply shop at home online, order one or more meal kits, and have those delivered to their doorstep within an hour or two, and with the ability to add other grocery staples.

Additionally, Boston-area Roche Bros. is pushing the technology envelope through its partnership with Popcart.  Popcart is a plug-in to your internet browser that seamlessly turns a recipe into a shopping list.  With the click of a button, you can go from viewing a recipe online to having an online shopping cart filled with the ingredients required to make the meal, that you can then either have delivered to your house or you can pick up at one of four area Roche Bros. stores.

In the new era of grocery delivery and the desire to make cooking at home as easy as possible, grocery stores are perfectly positioned to both push back at and improve the meal kit business model as part of their overall growth strategy.

When in Rome: Our Take on the ICSC OAC (Open Air Summit)

Posted in Retail, Retail Sales

ICSCWe know from our high school history lessons that large scale public shopping centers have been around since the days of the Roman Empire, if not before. The fabled open air markets of cities like Istanbul and Damascus still exist today and are often the backdrop of our favorite action movies and TV shows (anyone see Skyfall?) As we heard at this month’s ICSC OAC conference in Miami, the industry is seeing a return to days long ago with an uptick in interest in open air centers, including in urban areas across the United States. ICSC’s OAC conference brings together high level executives in the retail industry to discuss the key trends, challenges and opportunities facing the Open Air Shopping Center community, and this year’s event did not disappoint. Here’s what we learned:

Experience Makes Perfect

The notion of “If you build it, they will come” has taken on a different twist for developers and investors looking to build a portfolio of successful projects. E-commerce is changing the retail landscape offering consumers the option of purchasing nearly anything they need or want from their smart phones. This is challenging developers/landlords and retailers rethink the critical question: what will get people to visit our property and stores?

The answer? Creating a retail environment with customer friendly amenities, and a multitude of experiences. The owners of open air centers are focusing on forming a destination with memorable spaces and places. Many of these open air projects not only open up to the community, but they often serve as their civic hubs and gathering places. A terrific example of this is a ground-up, mixed-use development that we are working on for a client in the Florida market, which will offer approximately 600,0000 square feet of a mix of shopping, dining and entertainment venues; 500,000-1,000,000 square feet of prime, Class A office space; approximately 1,000 planned residential units; and even twin hotel towers anchoring its main street retail.

Discount and Value to the Front of the Line

We know from industry data that millennials would rather use their disposable income for experiences rather than owning things. These younger consumers also prefer buying discount or off-price products. Outlet centers, most in open air format and including experiential offerings such as restaurants, food halls, family entertainment centers, grocery stores, cinemas and other attractions are enjoying growing popularity. As we reported after ICSC’s 2017 Mid-Atlantic Conference and DealMaking earlier this year, discount and value retailers have been building on a hot streak. The consensus we’ve heard on discount retailers is that they have been able to undercut department store competitors on price without sacrificing much by way of style or quality. As a result, consumers still cannot get enough.

Mixed Views on the Economy

In general, the tenor at ICSC OAC was that while open air centers remain a favored asset for investors, we are still seeing cautious optimism among retailers. Retailers are being more conservative about new deals, perhaps a result of uncertainties on evolving tax law changes and the new presidential administration. The brokers we spoke to are generally more positive. Conversely, retail developers seem more gloomy on the markets (for example, many are being priced out of major urban locations such as New York City). We think that the billions of dollars in CBMS debt coming due in the next few years will continue to put pressure on regional malls (Class B/C) and some major retailers as well.

Innovation at Work

Despite various views on the economic climate, everyone we spoke with agreed that landlords and retailers need to find creative ways to partner together to make the store and center experience more customer friendly. Also, taking the much-discussed convergence of brick and mortar and online even further, we were fascinated by one conversation we were a part of where a major retailer, which started as a catalogue company many years ago, is using the massive amount of customer data they have accumulated based on their catalog business and more recently their ecommerce business to their advantage. By knowing where their customers are located, they are able to use that information to identify ideal locations for their brick and mortar stores. With 30 or so stores now across the U.S., this retailer shared that e-commerce sales typically decrease a little when a store is opened, but that over time the e-commerce sales actually increase without impact on store sales because the stores are helping them to find new customers in areas where they know their products are in demand. The synergy between this retailers’ stores and e-commerce business is working for them, and we think, is evident of a growing trend we will continue to see play out.

We are looking forward to several upcoming industry events in the spring, including Bisnow’s National Retail East event in New York in April, and of course ICSC RECon later in May, and we promise to keep you informed on what we’re hearing and seeing in the dynamic retail marketplace as we travel.